The October monthly consumer price index (CPI) indicator was relatively benign, coming in at a headline annual rate of 4.9 per cent down from the 5.5 per cent registered in September.
The details of the report weren’t quite as encouraging.
There are signs of some ongoing “stickiness” in trimmed-mean inflation which remains high at 5.3 per cent, and the October report lacks coverage of service sector price pressures, which is the major concern of the RBA.
The minutes from the November meeting stated that “whether further tightening of monetary policy is required to ensure that inflation returns to target in a reasonable timeframe would depend on how the incoming data alter the economic outlook and the evolving assessment of risks”.
In that context, it seems clear that in the wake of the November policy rate increase, and the benign October monthly CPI indicator reading, the case for a further increase in December is a difficult one for the RBA to prosecute.
RBA governor Michele Bullock has struck a well-balanced tone in her recent remarks. She has outlined the domestic challenges around inflation containment and reiterated that “a more substantial monetary policy tightening is the right response to inflation that results from aggregate demand exceeding the economy’s potential to meet that demand”.
That suggests that after an extended period, where its tolerance for an elongated return of inflation to target has been much greater than most other developed country central banks, the tolerance well is pretty dry.
At the same time, she has noted the “need to be careful” in ensuring that any further increases in the policy rate do not create excessive downside risks in growth and employment.
This leaves the RBA with a moderate tightening bias, albeit one that is conditional on incoming data and attendant risk assessments.
I expect that will be the flavour of the tone that accompanies a decision on Tuesday to leave the policy rate unchanged.
In a highly uncertain global and domestic environment, both the tightening bias and the articulation of that optionality/conditionality is entirely appropriate.
While acknowledging that a December policy rate rise is perhaps too difficult to prosecute, my view of the balance of risks is that inflation may be even more intractable.
The most recent RBA inflation forecasts assume “that productivity growth would recover over the year ahead”. That is a critical assumption.
Wage increases are digestible in times of reasonable productivity growth. However, productivity growth in Australia has been abjectly poor and even with relatively modest wage growth, the most recent (if dated) figures show unit labour cost growth (the most relevant labour cost gauge for inflation) is running at over 7 per cent per annum.
By contrast, the current annual rate of unit labour cost growth in the US is 1.9 per cent with the difference mostly attributable to productivity growth.
The interplay between productivity and wage growth are domestic developments upon which the RBA will cast a keen eye.
Central bankers around the world have also remarked on structural sources of “stickiness” in global inflation. The globalisation of labour supply (after the fall of the Berlin Wall and the “export” of labour from large emerging market economies such as China and India) is abating; globalisation of goods markets is in retreat as governments everywhere introduce protectionist measures under the guise of “industrial policy” and “national champions”; domestic regulation of markets is increasing in scope (leading to upward price pressures); and Baby Boomer workforce participation is declining (limiting labour supply and lifting wages).
To be fair, Australia’s high immigration rate somewhat mitigates these influences over the longer-term but won’t eradicate them. Indeed, in the short-term, pressure on housing rents from immigration may tip inflation risks the other way. An unwillingness to tackle housing supply may entrench this problem.
As extant as these risks are, there are some going the other way with risks that any slowdown and attendant disinflation obviates the need for further monetary tightening.
Important in determining the potential timing of any further policy rate hike will be the September quarter national accounts which (a little unhelpfully) are released a day after the RBA Board’s December meeting on 6 December. They are important not just because of the conventional measures of economic activity growth that they provide but also for wage, productivity, and unit labour cost indications. Finally, the December quarter consumer price index on 31 January also looms as a key staging post in determining whether another policy rate hike is appropriate.
Also important will be unfolding developments in China which were given explicit reference in the governor’s November statement, and which continue to remain troublesome.
That probably means that the next window for a policy rate hike will not occur until the February RBA board meeting on 6 February and then only if unit labour cost growth and inflation refuse to show indications of meaningful decline or prospects thereof.
Stephen Miller, investment strategist, GSFM
